AI and geopolitical clouds looming, quick money fleeing to U.S. stocks, pouring into gold and U.S. bonds for safety

The potential disruptive impact of artificial intelligence and the escalating geopolitical tensions are triggering sharp re-pricing in global capital markets, prompting large-scale withdrawals of systemic funds from U.S. equities and shifting into traditional safe-haven assets such as U.S. Treasuries and gold.

Due to weakness in tech stocks and uncertain macro policies, U.S. stock market volatility has increased significantly in recent months, with the actual volatility of the S&P 500 reaching its highest level since December last year. Against this backdrop, quantitative signals-driven “fast money” is reacting quickly, with systematic investors like commodity trading advisors (CTAs) sharply reducing their risk exposure to U.S. stocks, with some funds even lowering their equity allocations to zero.

The panic withdrawal of funds has directly driven a strong rebound in safe-haven assets. According to Bloomberg, U.S. Treasuries achieved their best monthly performance in a year in February, with yields on long-term Treasuries rising notably; simultaneously, gold prices surged past the $5,000 per ounce mark.

Currently, with the Federal Reserve expected to keep interest rates unchanged, market defensive sentiment remains strong. Investors are awaiting further macroeconomic data to confirm the direction of the labor market and inflation trends. Until then, the trend of shifting funds into high-quality assets is expected to continue dominating the market.

Quantitative funds rapidly sell off U.S. stocks

As the continuous rollout of AI tools sparks concerns over industry reshuffling and inflation trends, coupled with Trump’s warnings about Iran negotiations intensifying Middle East tensions, panic on Wall Street is spreading. The intraday volatility of the S&P 500 has averaged 1.2% this month, with tech stocks bearing the brunt; Nvidia recently plunged 5.8% in a trading session, dragging the Nasdaq 100 lower.

In response to this turbulence, quantitative investment firms are quickly shifting to defensive positions. Bloomberg citing Barclays data shows that CTA funds relying on mathematical models have reduced their U.S. stock allocations to around the 50th percentile. Goldman Sachs’ trading platform indicates that systemic strategies have turned their U.S. equity exposure negative this month, with client demand for downside protection surging.

Trend-following fund McElhenny Sheffield Capital Management cut its stock holdings to zero on February 6, fully shifting into gold and U.S. Treasuries. Portfolio manager Grant Morris stated that when the market breaches risk management levels, the fund switches entirely to defensive mode, only re-allocating to U.S. stocks when a clear upward trend emerges.

Safe-haven demand drives U.S. Treasuries to their best monthly performance

The outflow of funds from equities has directly benefited the U.S. Treasury market, which now totals around $30 trillion. According to EPFR data, in the first two months of this year, approximately $16.3 billion flowed into U.S. Treasuries. This has caused the benchmark 10-year U.S. Treasury yield to decline by about 0.2 percentage points since the end of January, hovering near the 4% lower bound. In February, the overall return on U.S. Treasuries reached 1.5%, with long-term Treasuries rising by 4%, marking their best performance since the same period last year.

James Athey, portfolio manager at Marlborough Investment Management, said that the U.S. Treasury market’s large size and high liquidity make it the top destination for safe-haven trades. Gregory Faranello, head of U.S. rates trading and strategy at AmeriVet Securities, also noted that despite the possibility of technical breakouts, the U.S. Treasury market clearly possesses safe-haven attributes.

Not only in the U.S., but global sovereign bond markets are also benefiting. Japanese bonds are on track for their largest monthly gain since November 2023, with overseas investors purchasing Japanese debt at the second-highest level in history last month.

Structural upside for gold remains substantial

Amid the huge demand for capital preservation, gold has also experienced explosive growth. As a traditional hedge against macroeconomic uncertainty and stock market pullbacks, gold’s safe-haven value is being amplified in the current turbulence.

Jackie Rosner, Managing Director at PAAMCO Prisma, stated at the iConnections Global Alts conference that despite the recent sharp rebound, gold remains underweighted in institutional portfolios, with current allocations still below levels from 15 years ago. She predicts that if macro uncertainties persist, gold prices could reach $6,000 or higher this year. For institutions that have already exited U.S. stocks to invest in gold, this strategy has begun to pay off, with McElhenny Sheffield Capital Management achieving a 4.35% return this year.

Market awaits clues on rate cuts and economic data

Although safe-haven sentiment dominates, due to ongoing uncertainties in the Federal Reserve’s policy path, some investors remain cautious about fully bullish positions on U.S. Treasuries. In January, Fed policymakers kept borrowing costs in the 3.5% to 3.75% range, and traders currently see almost zero probability of a rate cut in March. However, markets still expect at least two rate cuts by the end of the year, especially with Trump’s nominee Waller expected to succeed Powell as Fed Chair.

JPMorgan portfolio manager Priya Misra believes that as markets reprice credit risk, holding U.S. Treasuries with interest rate risk becomes more attractive. Meanwhile, investors like George Catrambone, head of fixed income at DWS Americas, and James Athey have begun to shift their positions on the 10-year U.S. Treasury to neutral or short, citing the rapid decline in yields needing a breather.

For off-market funds, clear economic data is a prerequisite for entry. Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said that only with clear signs of labor market weakening can a genuine rebound be confirmed. The upcoming U.S. non-farm payrolls report next week could provide critical guidance for the market’s next move.

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